WTI crude oil prices were down again Monday, even as news that OPEC was considering extending production cuts reached markets. For a change, prices didn't reflect the news of possible cuts, and it's mostly the fault of U.S. shale producers.
The U.S. crude oil benchmark is down from a range of $50-$54 per barrel from the end of February and the beginning of this month and it is now holding in the high-$40 range after reports that crude oil inventories saw builds for a ninth-consecutive week last week.
The builds in U.S. crude stocks are bearish for markets and have been offsetting the bullish statements from OPEC today that the group is considering extending its production cuts through the second half of this year, reports Reuters. While the group will not decide official whether or not to extend cuts until May, money managers cut their long positions by a record 150,000 contracts indicating many are not willing to take a chance on future cuts supporting oil prices.
"It looks like someone is trying to jawbone the market," Gene McGillian, manager of market research for Tradition Energy, told Bloomberg.
Rising U.S. rig count is creating weakness in oil prices
Exploration and production operations continue to spool up in the United States, with the U.S. rig count growing by 21 to 789 last week. Crude production has climbed to 9.1 MMBOEPD, the most since February of last year according to the EIA, and U.S. oil prices continue to hold below $50 as markets wait to see what OPEC does next.
Libya, which was granted an exemption from production cuts, hopes to resume shipping from the Es Sider and Ras Lanuf ports in the next seven to ten days, according to Jadalla Alaokali, a board member at Libya's National Oil Corp. The country's oil output has increased to 646 MBOPD from 621 MBOPD due to more production from Waha Oil Co. he added.
"The risks that OPEC has painted itself into a corner cannot be ignored and it may need to extend, or even increase, cuts if the response from shale producers is more vigorous than we currently model," a report from JP Morgan said Monday.
Inventory data is recovering in reverse
Despite the apparent wariness of the markets due to increases in crude oil stockpiles in the United States, stockpiles are being drawn down across the globe. The U.S. will likely be the last to see draws on its inventories, effectively reversing the order in which inventories saw builds, according to a note from Michael Wittner at Societe Generale.
Crude stockpiles continue to be tight in Asian markets, and have even started to decline in Europe below the top of the five-year range, he notes.
"The U.S. remains the holdout," said Wittner. "Both crude and product stocks remain at or above five-year highs."
"The U.S. will probably be the last place to see inventories draw down and normalize, especially as its domestic crude output has bottomed out and is growing again sequentially. It should be remembered that back in 2014, the global oversupply – visible in the form of high onshore inventories – began in the U.S. due to booming shale oil production; however, it took about six months for the oversupply to become visible in onshore stocks in Europe, Japan and China. Now, the rebalancing seems to be happening in reverse, with the drawdowns not yet visible in the U.S."